What Is a Bear?
A bear is an investor who believes that a particular security, or the broader market is headed downward and may attempt to profit from a decline in stock prices. Bears are typicallypessimistic about the state of a given market or underlying economy. For example, if an investor were bearish on the (S&P) 500, that investorwould expect prices to fall and attempt to profit from a decline in the broad market index.
A bear may be contrasted with a bull.
Key Takeaways
- A bear is an investor who is pessimistic about the markets and expects prices to decline in the near- to medium-term.
- A bearish investor may take short positions in the market to profit off of declining prices.
- Often, bears are contrarian investors, and over the long-run bullish investors tend to prevail.
- Bears can be contrasted with bulls, who are optimistic about the market's future.
Understanding Bears
Bearish sentiment can be applied to all types of marketsincluding commodity markets, stock markets, and the bond market. Thestock market is in aconstant state of flux as the bears and their optimistic counterparts, bulls, attempt to take control. Over the past 100 years or so, the U.S. stock market has increased, on average, by about 10% per year, inclusive of dividends.
This means that every single long-term market bear has lost money. That said, most investors are bearish on some markets or assets and bullish on others. It is rare for someone to be a bear in all situations and all markets.
20%
A bear market technically occurs when market prices drop 20% or more from recent highs.
Bear Behaviors
Becausethey are pessimistic concerningthe direction of the market, bears usevarious techniquesthat, unlike traditional investing strategies, profit when the market falls and lose money when it rises. The most common of these techniques is known as short selling. This strategy represents the inverse of the traditional buy-low-sell-high mentality of investing. Short sellers buy low and sell high, but in reverse order, selling first and buying later once -- they hope -- the price has declined.
Short selling is possible by borrowing shares from a broker to sell. After receiving the proceeds from the sale, the short seller still owes the broker the number of shares he borrowed. His objective, then, is to replenish them at a later date and for a lower price, enabling him to pocket the difference as profit. Compared to traditional investing, short selling is fraught with greater risk. In a traditional investment, because the price of a security can only fall to zero, the investor can only lose the amount he invested. With short selling, the price can theoretically rise to infinity. Therefore, no limit exists on the amount a short seller stands to lose.
Bearish Characteristics
Characteristics of a bear market include:
- A prolonged period of declining stock prices (usually by at least 20% or more over a minimum of two months)
- A weak or weakening economy
- Declining investor confidence
- Declining investor optimism
- Rising unemployment
- A general expectation that things will be depressed for an extended period
Example of a Bear
Certain high-profile investors have become famous for their persistent bearish sentiment. Peter Schiff is one such investor known in Wall Street circles as the quintessential bear. A stockbroker and author of several books on investing, Schiff evinces unwavering pessimism on paper investments, such as stocks, and prefers those with intrinsic value, such as gold and commodities. Schiff garnered accolades for his prescience in predicting the Great Recession of 2007 to 2009 when, in August 2006, he compared the U.S. economy to the Titanic.
It should be noted, however, that Schiff, throughout his career, has made many doom-and-gloom predictions that never came to fruition.
How Can Bears Profit from Down Markets?
Bears are pessimistic about the market and think that it will go down. A bear can profit from being right about this by selling stocks or ETFs short in the market. This involves borrowing shares and then selling them, hoping to buy them back lower and return the shares to the lender. There are also inverse ETFs and mutual funds that rise when markets fall. Bears can also use derivatives such as buying put options or selling futures to go short.
How Long Do Bear Markets Last?
Bear markets occur regularly throughout history and are normal. On average, bear markets in the U.S. have lasted 289 days (around 9.50 months). In contrast, bull markets have lasted, on average, 2 years and 8 months.
Why Are They Called Bulls and Bears?
There are a few competing theories of where the terms bulls and bears came from. One suggestion is that bulls attack by bringing their horns upward, while bears attack by swiping their paws downward. A second theory claims it originates from the early fur trade, where bearskins were seen as particularly risky.
FAQs
A bear is an investor who believes that a particular security, or the broader market is headed downward and may attempt to profit from a decline in stock prices.
What are the cons of bear market? ›
Cons of investing during a bear market
Uncertain timing and continued declines: Bear markets can be unpredictable, and prices may continue to fall after an initial decline. Investing during a bear market carries the risk of further losses if market conditions worsen or the downturn lasts longer than expected.
Is it good to trade in a bear market? ›
Bear markets can mean opportunities to buy quality stocks and other assets for lower amounts than you'd be able to otherwise. Some markets, such as bonds, defensive stocks and certain commodities like gold often perform well in bearish downturns.
What are the benefits of a bear market? ›
Benefits of 'The Bear Market'
- Lower valuations on equities are offered, which reduces risk for equity investors. ...
- Significant buying opportunities are presented. ...
- The market renders an advantage to the judicious buyer.
On the other hand, “bears” have a pessimistic perspective and anticipate a decrease in prices. They generate revenue by repurchasing assets at a loss and then selling them at a profit.
How to trade bear market? ›
Ways to Profit in Bear Markets
- Short Positions. You take a short position, also called short selling or shorting, when you borrow shares and sell them in anticipation of the stock price falling more in the future. ...
- Put Options. ...
- Short ETFs.
Negative sentiment.
During a bear market, market sentiment is poor. Investors are pessimistic about the stock market's prospects, making them more likely to sell assets than hold them. Investors are likely to put their money into safer investments like bonds because of concerns about future market performance.
Should you stay invested in a bear market? ›
“Investors who remain even keeled and disciplined in a negative market are likely to avoid common pitfalls and potentially enjoy better times ahead. Historically, the longer you stay invested, the greater your possibility of meeting your long-term goals.” Check in with a financial advisor.
Is it harder to trade in a bear market? ›
Trading as a beginner is difficult no matter what type of market you're in. IMO, for an experienced trader, a bear market is easier to make money in because it falls about 3x as fast as it rises. Markets don't melt up. Probably a bull market is easier as long as you aren't too greedy & hold on for the top.
How long do bear markets usually last? ›
The duration of bear markets can vary, but on average, they last approximately 289 days, equivalent to around nine and a half months. It's important to note that there's no way to predict the timing of a bear market with complete certainty, and history shows that the average bear market length can vary significantly.
Bulls are generally powered by economic strength, whereas bear markets often occur in periods of economic slowdown and higher unemployment. Instead of wanting to buy into the market, investors want to sell, often fleeing for the safety of cash or fixed-income securities.
How to make money fast in the stock market? ›
Day Trade. If you're a nimble and proficient trader, probably the “easiest” way to make fast money in the stock market is to become a day trader. A day trader moves in and out of a stock rapidly within a single day, sometimes making multiple transactions in the same security on the same day.
How much cash should I have in a bear market? ›
While there is no one-size-fits-all number when it comes to how much cash investors should hold, financial advisors typically recommend having enough money to cover three to six months of expenses readily available.
How much cash do you hold in a bear market? ›
It's wise to have some savings set aside for an emergency, and you may also want to keep some cash available to invest in the stock market when you feel the time is right. Financial advisers often recommend having the equivalent of at least six months' income in cash to cover any unexpected expenses.
What are the best stocks to buy during a market crash? ›
The best recession stocks include consumer staples, utilities and healthcare companies, all of which produce goods and services that consumers can't do without, no matter how bad the economy gets.
What is bear vs stock? ›
Key Takeaways
A bull market is when stock prices are on the rise and economically sound, while a bear market is when prices are in decline. The origin of these expressions is unclear, but one reason could be that bulls attack by bringing their horns upward, while bears attack by swiping their paws downward.
What is a bear vs bullish stock? ›
Bullish means optimistic; it refers to a belief that investments will increase in value in the future. Bearish, on the other hand, means pessimistic, and generally refers to a belief that investment prices will fall in the future.
Why do they call it a bear market? ›
Believe it or not, the term "bear market" originates with pioneer bearskin traders. The country's early traders would sell skins they'd not yet received – or paid for. Because the traders hoped to buy the fur from trappers at a lower price than what they'd sold it for, "bears" became synonymous with a declining market.
What is an example of a bear market? ›
Bear markets can last from a few weeks to several years. The first and most famous bear market was The Great Depression. The dot com bubble in 2000 and the housing crisis of 2007–2008 are other examples.
